Most funds in this sector aim to generate a rising income, as well as increase the value of your original investment over the long term. Any income can be paid out to you as cash or reinvested back into the fund to help boost long-term growth.
Different fund managers take different approaches to income investing. Some focus on larger companies that are seen to be more stable and have paid regular dividends for many years. Others invest in higher-risk small and medium-sized companies. These might pay a lower income to start with but can have more dividend growth potential. Some managers also use their ability to invest up to 20% of the fund overseas to add diversification and allow exposure to sectors and industries less available in the UK equity market.
Our view on the UK Equity Income sector
Investing in a dividend-paying company can mean your income and capital grows as the company grows. The best companies will grow their profits and dividends over the long term, though not all companies' profits – and therefore their dividends – are sustainable. The extraordinary events of 2020 provided a particularly harsh lesson in this regard as the effects of the COVID-19 pandemic severely impacted upon many companies' ability or willingness to pay dividends.
In general, however, we like equity income funds as an expert fund manager invests in a range of companies reducing the impact if one gets into trouble. It's less risky and more convenient than trying to choose individual shares yourself.
Given inflation in the UK is elevated above the Bank of England’s 2% target at the moment it’s likely we’ll see more rate rises in the coming months. In practice the impact of inflation on earnings will vary by economic sector. Companies that pass on higher input costs to end consumers can preserve or grow their earnings and distribute the excess in dividends if they wish.
Dividends are clearly important for investors who require income, but an equity income fund can also be relevant for those seeking capital growth. If not required now, dividends can be reinvested to increase the number of shares held, from which more dividends can be taken at a later date. Repeating this process over a long period (known as compounding) is a way to grow capital, though there are no guarantees.
We think equity income funds can provide an important element of almost any investment portfolio. Reinvesting dividends when you don't need the income could potentially help your pot grow at a faster rate. However, investments and their income will go up and down in value, so you could get back less than you invest.
Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.
We regularly review all the major investment sectors. Here we provide comments on a selection of funds in the UK Equity Income sector. They're provided for your interest but are not a guide to how you should invest. If you're unsure if an investment is right for your circumstances please seek personal advice.
Each of the funds below can take their charges from capital. This can increase the yield but reduce the potential for capital growth. All investments can fall as well as rise in value so you could get back less than you invest. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% a year - view our charges.
Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don’t, we offer ready-made solutions which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.
Wealth Shortlist fund reviews
The fund's managers are disciplined in seeking out companies they think can grow their cash flow, as that's what ultimately pays investors' dividends. They also keep the fund diversified to reduce the impact of any dividend cuts by a holding on the wider portfolio. Adrian Frost, Nick Shenton and Andy Marsh mainly invest in large UK companies, but they also invest in medium-sized and overseas companies if they think there's an excellent opportunity. Frost is one of the most experienced managers in the UK Equity Income sector, and we think he's built a talented team around him.
We think the managers' combined skill, discipline and experience puts them in a strong position to deliver healthy income and long-term growth, but there are no guarantees. The managers have the flexibility to invest into high yield bonds which if carried out can increase overall risk in the portfolio.
The fund managers look for companies which are market leaders with a competitive advantage and predictable cash flow. This tends to be a more concentrated fund, so each holding can have a significant impact on performance, both positively and negatively, and can therefore increase risk. Chris Murphy is an experienced income investor and has managed the fund since April 2009. He was joined by co-manager James Balfour in June 2016.
The managers target a higher income than the FTSE All Share, alongside capital growth over the long term. The core of the portfolio is invested in high-quality, cash-generative companies, but they also look at companies that are recovering or unloved by other investors. In addition, they invest in some higher-risk medium-sized and smaller companies.
Jupiter Income focuses on undervalued UK companies which could pay a dividend, so the fund can add diversification to an income portfolio. This style bias can mean the fund is out of favour through certain periods of the market cycle.
Ben Whitmore has managed funds for more than 20 years and is experienced when it comes to unearthing undervalued companies. He is assisted by Dermot Murphy. As well as the Jupiter Income fund, the two run Jupiter UK Special Situations and Jupiter Global Value Equity, using the same process and value bias. Whitmore invests in some overseas companies in this fund too, providing some diversification.
Whitmore and team have been steadfast in their value style through thick and thin. We think the fund would work well alongside other UK equity income funds with a different style bias to add diversification. Investors should be aware that this is a concentrated portfolio which can increase the volatility of returns and is higher risk.
The fund has a slightly different objective to other income funds. It aims to provide a rising income, but with lower volatility than the market and an emphasis on sheltering wealth in a falling market. This is a trait of Troy's range of funds and makes the fund a good diversifier compared to others in the sector.
The fund is managed by Blake Hutchins who is supported by Fergus McCorkell. They also have the support of Troy’s wider investment team of 14. The team work collaboratively, sharing a common approach to investment.
A key element of the approach is to avoid economically sensitive, less consistent businesses and those that require high levels of investment to keep going. There’s a greater focus on larger companies compared to some other income funds. The managers also invest up to 20% overseas where they find the best opportunities not available within the UK market. This is quite a concentrated fund and, while the team focuses on minimising losses, it can increase risk. They like high-quality, dependable companies that could do well even when the economy is weak, and some overseas companies that offer diversification to their UK stock selections.
Latest news on this sector
Joseph Hill | 25 July 2023
We look at what’s happened in the UK economy, how the stock market's been coping, and how our Wealth Shortlist funds have fared. Read article.
25 July 2023 | 7 min read
Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.